Year-End Tax Planning 2013 for Businesses and Individuals

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1 Year-End Tax Planning 2013 fr Businesses and Individuals As 2013 draws t a clse, there is still time t minimize yur 2013 taxes and plan ahead fr Yearend tax planning has the ptential t be especially beneficial in 2013, due in part t a number f tax breaks that may expire December 31 st. At Smith Dicksn, we ve put tgether a number f ptential taxsaving strategies fr yu t cnsider. While nt a cmprehensive guide, these will give yu plenty t cnsider t help save taxes if yu act befre year-end. Of curse, we can determine a specific plan t maximize yur tax savings when we meet with yu. If yu have any questins regarding year-end planning r wuld like t discuss yur specific tax needs, please cntact Debrah Dicksn, CPA, CFF, MAFF at (Nte: As a reference fr 2013 tax rates, as well as varius deductins and exemptins, see the "Federal and Califrnia Tax Outlk" at the end f this guide.) INDIVIDUALS: As cmpared t 2012, when there was s much uncertainty abut tax increases, tax planning fr 2013 and 2014 is mre straightfrward. On January 1, 2013, Cngress passed the American Taxpayer Relief Act f 2012 (ATRA), which made lwer rdinary-incme tax rates permanent fr mst taxpayers, althugh sme taxpayers wh were previusly in the 35% bracket nw face a higher rate. Keep in mind that persnal tax planning is very tailred by its nature, since everyne s situatin is different. Review the strategies belw and discuss thse f interest with us. Net investment incme % Surtax and 0.9% Medicare Tax: Effective January 1, 2013, taxpayers with adjusted grss incme (MAGI) ver $200,000 per year ($250,000 fr jint filers and $125,000 fr a married persn filing separately) may we net investment incme tax (NIIT). This tax equals 3.8% f the lesser f yur net investment incme r the amunt by which yur MAGI exceeds the threshld. Since the rules are cmplex as t NIIT, cnsult us fr detailed infrmatin, as well as strategies t avid r defer NITT liability. Timing strategies: A key aspect f tax planning is t estimate bth yur 2013 and 2014 adjusted grss incme (AGI), which will then help t dictate whether t accelerate r defer incme r deductins. Fr example, a strategy f deferring incme until 2014 and accelerating deductins int 2013 may enable yu t claim larger deductins, credits, and ther tax breaks fr 2013 that are phased ut ver AGI levels. Varius incme deferral/acceleratin ptins include: installment ntes, bnuses, capital gains and distributins frm retirement accunts. Deductins timing: These methds can include pstpning/accelerating payment n yur mrtgage and prperty taxes, state estimated tax payment, retirement plan cntributins, health care premiums, dnatins and ther deductins that specifically impact yur situatin. We can review varius scenaris with yu that can help in making these decisins.

2 Retirement savings plans: Tax-saving pprtunities cntinue fr retirement planning due t the availability f Rth IRAs, changes that make regular IRAs mre attractive, and ther retirement savings incentives. These include (but are nt limited t) the fllwing: Traditinal IRAs: In 2013, the annual deductible cntributin limit fr an IRA is $5,500. A $1,000 catch-up cntributin is allwed fr taxpayers age 50 r lder by the clse f the taxable year, making the ttal limit $6,500 fr these individuals. Fr 2013, the AGI phase-ut range fr deductibility f IRA cntributins is between $59,000 and $69,000 f mdified AGI fr single persns (including heads f husehlds), and between $95,000 and $115,000 f mdified AGI fr married filing jintly. Abve these ranges, n deductin is allwed. Spusal IRA: The spusal IRA cntributin is limited t the lesser f $5,500 fr 2014 plus age 50 catch-up cntributins, r the ttal cmpensatin f bth spuses reduced by the ther spuse's IRA cntributins (traditinal and Rth). This applies if an individual files a jint return and has less cmpensatin than his r her spuse. Fr 2013, the phase-ut range f deductibility fr a married filing jintly cuple where nly ne spuse is cvered by a retirement plan at wrk is between $178,000 and $188,000 f mdified AGI. Rth IRA: The 2013 limit n Rth IRA cntributins is $5,500. The maximum cntributin is phased ut in 2013 fr persns with an AGI abve certain amunts: $178,000 t $188,000 fr married filing jintly, and $112,000 t $127,000 fr single taxpayers (including heads f husehlds); and between $0 and $10,000 fr a married persn filing separately wh lived with the spuse during the year. Rth IRA cnversin: A traditinal IRA (including SEPs and SIMPLE IRAs), 401(a) qualified retirement plan, 403(b) tax-sheltered annuity r 457 gvernment plan may be rlled ver int a Rth IRA. Since this is treated as a taxable event, yu will pay tax n the amunt cnverted. N penalties will apply if all the requirements fr such a transfer are satisfied. Fr 2013, the $100,000 incme limit n Rth IRA cnversins des nt apply and taxpayers will be able t make Rth IRA cnversins withut regard t their AGI. Other rules and restrictins apply, s talk with us befre ding such a cnversin. 401(k) plans: The 401(k) elective deferral limit is $17,500 fr If yur 401(k) plan has been amended t allw fr catch-up cntributins fr 2013 and yu will be 50 years ld by December 31, 2013, yu may cntribute an additinal $5,500 t yur 401(k) accunt, fr a ttal maximum cntributin f $23,000 ($17,500 in regular cntributins plus $5,500 in catch-up cntributins). SIMPLE plan: The SIMPLE plan deferral limit is $12,000 fr If yur SIMPLE plan has been amended t allw fr catch-up cntributins fr 2013 and yu will be 50 years ld by December 31, 2013, yu may cntribute an additinal $2,500. Annual Gift Tax Exclusin: The mst cmmnly used methd fr tax-free giving is the annual gift tax exclusin, which, fr 2013, allws a persn t give up t $14,000 t each dnee withut reducing the giver's estate and lifetime gift tax exclusin amunt. A persn is nt limited as t 2

3 the number f dnees t whm he r she may make such gifts. Further, because the annual exclusin is applied n a per-dnee basis, a persn can leverage the exclusin by making gifts t multiple dnrs (family and nn-family). Thus, if an individual makes $14,000 gifts t 10 dnees, he r she may exclude $140,000 frm tax. In additin, because spuses may cmbine their exemptins in a single gift frm either spuse, married givers may duble the amunt f the exclusin t $28,000 per dnee. A persn may nt carry ver his r her annual gift tax exclusin amunt t the next calendar year. Qualifying tuitin payments and medical payments d nt cunt against this limit. Alternative Minimum Tax (AMT): The effect f year-end planning strategies n the AMT shuld be carefully cnsidered, including state prperty taxes, state incme taxes, miscellaneus itemized deductins, and persnal exemptin deductins. Fr 2013, due t legislatin in early 2013, the alternative minimum tax exemptin amunts retain their increased amunt t help individuals avid being subject t the AMT. The exemptin amunts in place fr 2013 are: (1) $80,800 fr married individuals filing jintly and fr surviving spuses; (2) $51,900 fr unmarried individuals ther than surviving spuses; and (3) $40,400 fr married individuals filing a separate return. Als, fr 2013, because Cngress acted t extend the previus years' rules, nnrefundable persnal credits can ffset an individual's regular and alternative minimum tax, and capital gains will be taxed at lwer favrable rates fr AMT. Educatin tax credits: Cngress has recgnized that the csts f educatin, in particular higher educatin, are significant and can be a burden t families and individual students. As such, a number f tax-saving ptins are nw available. These include: American Opprtunity Tax Credit: The maximum credit fr 2013 is $2,500 (100% n the first $2,000, plus 25% f the next $2,000) fr qualified tuitin and fees paid n behalf f a student (i.e., the taxpayer, the taxpayer's spuse, r a dependent) wh is enrlled n at least a half-time basis. The credit is available fr the first fur years f the student's pst-secndary educatin. Fr 2013, the credit is phased ut at mdified AGI levels between $160,000 and $180,000 fr jint filers, and between $80,000 and $90,000 fr ther taxpayers. Frty percent f the credit is refundable, which means that yu can receive up t $1,000 even if yu we n taxes. Lifetime Learning credit: The maximum in 2013 is $2,000 (20% f qualified tuitin and fees up t $10,000). A student need nt be enrlled n at least a half-time basis s lng as he r she is taking pst-secndary classes t acquire r imprve jb skills. As with the Hpe (American Opprtunity Tax Credit in 2013) credit, eligible students include the taxpayer, the taxpayer's spuse, r a dependent. Fr 2013, the Lifetime Learning credit is phased ut at mdified AGI levels between $107,000 and $127,000 fr jint filers, and between $53,000 and $63,000 fr single taxpayers. Cverdell Educatin Savings Accunts: Fr 2013, the aggregate annual cntributin limit t a Cverdell educatin savings accunt is $2,000 per designated beneficiary f the accunt. The limit is phased ut fr individual cntributrs with mdified AGI between $95,000 and $110,000 and jint filers with mdified AGI between $190,000 and 3

4 $220,000. The cntributins t the accunt are nndeductible but the earnings grw tax-free. Emplyer-Prvided Educatin Assistance: Qualified emplyer-prvided educatin assistance f up t $5,250 may be excluded frm incme and emplyment taxes under current law. Hwever, the 2010 Tax Relief Act nly made the exclusin available thrugh Student Lan Interest: Yu may be eligible t deduct interest paid n qualified educatin lans up t a maximum deductin f $2,500, subject t incme phase ut rules and incme($75,000 fr individuals and $150,000 fr married cuples filing a jint return). This treatment fr the student lan interest deductin is scheduled t expire after Energy-saving incentives: Hmewners wh make energy-saving imprvements, such as slar heating, energy-saving windws r an energy-efficient air cnditiner, may qualify fr a tax credit if these are installed befre Ppular tax incentives scheduled t expire: Several tax prvisins are scheduled t expire, unless Cngress acts, s taxpayers shuld accrdingly cnsider acting befre year-end These include: state and lcal sales tax deductin, exclusin f cancellatin f indebtedness n principal residence, mrtgage insurance premiums deductin, transit benefits, cntributin f capital gains real prperty fr cnservatin, IRA distributins t charity and teachers classrm expense deductin. BUSINESS: As part f yur year-end tax planning, cnsider all applicable write-ffs, traditinal timing techniques (incme and deductins), and tax incentives that will expire by 12/31/2013. Again, this is nt a cmprehensive list, especially fr cmpanies perating in specific industries (e.g., retail, restaurants, farming, cnstructin, etc.) where special deductins and tax incentives apply, s be sure t cntact us. Hwever, here are many tax strategies t cnsider fr mst businesses: Deductins: Wrking clsely with us, yu shuld always have strategies in place t take advantage f tax incentives fr yur nrmal business activities. Fr example, did yu knw that there is a deductin fr dmestic prductin activities? This applies fr up t 9% f incme frm manufacturing and certain ther dmestic prductin activities (r, if less, 9% f taxable incme determined withut regard t the deductin) and is ptentially tax deductible by eligible businesses. The deductin cannt be mre than 50% f yur cmpany s W-2 wages allcable t dmestic prductin grss receipts. If yu are a manufacturer, talk t us abut this deductin. As an emplyer, here are several that may apply fr yur business this year: 4

5 Emplyer-Prvided Child Care Credit: Fr 2013, emplyers may claim a credit f up t $150,000 fr supprting emplyee child care r child care resurce and referral services. The credit is allwed fr a percentage f qualified child care expenditures, including prperty used as part f a qualified child care facility, fr perating csts f a qualified child care facility and fr resurce and referral expenditures. Small Emplyer Pensin Plan startup cst credit: Fr 2013, certain small business emplyers that did nt have a pensin plan fr the preceding three years may claim a nnrefundable incme tax credit fr expenses f establishing and administering a new retirement plan fr emplyees. The credit applies t 50% in qualified administrative and retirement-educatin expenses fr each f the first three plan years. The maximum credit is $500 per year. Wrk Opprtunity Tax Credit: This is a Federal tax credit available t emplyers fr hiring individuals frm certain target grups wh have cnsistently faced significant barriers t emplyment. The prgram helps targeted wrkers mve frm ecnmic dependency int selfsufficiency as they earn a steady incme and becme cntributing taxpayers, while participating emplyers are able t reduce their incme tax liability. This gives yur business an expanded pprtunity t emply new wrkers and be eligible fr a tax credit against the wages paid. The credit is determined based n first-year wages paid fr emplyees hired n r befre December 31, Under current law, the WOTC will nt be available fr wrkers hired after this year, s cnsider hiring these qualified wrkers befre the end f the year. Timing strategies: Depending n yur situatin, yu may want t accelerate r defer either incme r deductins. Talk t us t see what is best fr yur particular needs. Here are a few f the mre cmmn items t cnsider (each with varius limitatins): Sectin 179 expenses: Yu might want t expense the full cst f an asset purchase, instead f depreciating it. This is a ppular methd fr smaller businesses. Fr 2013, the limit is $500,000 fr new r used equipment with a $2,000,000 investment ceiling n the purchase f ther qualifying prperty. A limited amunt f up t $250,000 may be claimed fr qualified real prperty. Unless Cngress acts t change the law, in 2014 and hencefrward the limit will decrease t $25,000, the beginning f phase-ut will lwer t $200,000, and expensing will be unavailable fr qualified real prperty. Depreciatin: Careful timing f equipment purchases can result in favrable depreciatin deductins in In general, yu can claim a full half-year s depreciatin fr mst f yur nn-real estate asset purchases, regardless f when the asset was placed in service. Hwever, a mid-quarter depreciatin must be used where the last quarter s purchases ttal mre than 40% f the year s purchases. In cmparisn t the half-year apprach, the mid-quarter methd can prduce a larger deductin fr assets acquired in the year but a smaller deductin fr thse assets acquired later. Bad debts: If yu want t claim a bad debt deductin, yur business tax returns must be filed n the accrual basis, and yu must be able t shw that the debt is partially r ttally wrthless. 5

6 Net perating lss (NOL): This can be used t reduce anther year s taxable incme. If yur business had a net perating lss fr 2013, the nrmal apprach is t apply thse lsses against taxable incme ging back tw tax years. Fr example, the lss culd be used t reduce taxable incme fr tax years as far back as Certain eligible lsses can be carried back three years, while farming lsses can be carried back five years. Tax incentives: The use f tax incentives can ften have lng-term ramificatins, sme that are unexpected, s it is imprtant t carefully evaluate any f these strategies with us. We ve fund that the fllwing techniques are applicable t many businesses: Accelerating r deferring incme: If yu expect yur AGI t be higher in 2013 than 2014, r yu expect t be in the same r higher tax bracket, yu may benefit by deferring incme t Varius methds may apply, such as delaying billings t custmers r changing yur accunting methd. Bnus Depreciatin: Yur business can claim a 50% bnus depreciatin fr qualified new assets placed in service in It als applies t vehicle depreciatin dllar limits; fr 2013, the firstyear depreciatin allwed fr vehicles subject t luxury vehicle limits is increased by $8,000. It is als allwed fr machinery and equipment used exclusively t cllect, distribute, r recycle qualified reuse and recyclable materials and qualified disaster assistance prperty. Nte that in 2014, with limited exceptins, bnus depreciatin des nt apply, s if yu are planning n purchasing new depreciable prperty, cnsider ding it this year if it makes business sense. Capitalizatin regulatins fr repairs: The IRS has finally finalized regulatins fr this gray area f the tax law. The regulatins prvide guidance fr the treatment f materials and supplies, repairs and rutine maintenance, de minimis threshlds, capital imprvements and dispsal f prperty subject t depreciatin. A deductin fr materials and supplies is allwed under a de minimis rule that includes prperty that has an acquisitin r prductin cst f $200 r less. Anther de minimis safe harbr states that in rder fr repairs t be deductible, the prperty must cst less than $5,000 per invice r item, as shwn by the invice, fr taxpayers with applicable financial statements (SEC filing, certified audited financial statement r financial statement required by a federal r state gvernment r agency (ther than a tax return)). Fr smaller businesses that d nt have an applicable financial statement, the threshld is $500 per invice. Research tax credit: Businesses shuld make qualified research expenses prir t the end f 2013 in rder t claim a research credit, since it will nt be available fr pst-2013 expenditures under current law. Califrnia single sales factr methd: Beginning in 2013, mst multi-state businesses are nw required t determine their Califrnia taxable incme using the single sales factr methd instead f ptentially using the three-factr frmula f prperty, payrll and sales. Nte that businesses perating nly in Califrnia are nt affected by this new law. 6

7 Califrnia Net Operating Lsses ( NOLs ) carryback: Starting in 2013, Califrnia will phase in a NOL carryback. Taxpayers are allwed a tw-year carryback with these stipulatins: 50% f the NOL generated in 2013, 75% f the NOL generated in 2014, and 100% f the NOL generated in 2015 and beynd. 7

8 FEDERAL AND CALIFORNIA TAX OUTLOOK EFFECTIVE 01/01/2013 AMERICAN TAXPAYER RELIEF ACT OF 2012 FEDERAL INCOME TAX: TOP INCOME TAX RATE 35% 35% 39.6% (1) TOP CAPITAL GAINS RATE 15% 15% 20% (1) TOP QUALIFIED DIVIDENDS RATE 15% 15% 20% (1) NET INVESTMENT INCOME % (2) FICA - (2%) - MEDICARE HOSPITAL INSURANCE TAX % (2) EXEMPTIONS - $3,800 $3,900 (3) SCHEDULE A (CHARITABLE, MORTGAGE INTEREST, TAXES) - DEDUCT %DEDUCT (3) CALIFORNIA INCOME TAX: TOP INCOME TAX RATE 9.3% 12.3% 12.3% MENTAL HEALTH SURTAX (INCOME >$1M) - 1% 1% SALES TAX (INCLUDING ORANGE COUNTY) % 8.0% DEPRECIATION EXPENSE SECTION 179 TOTAL $500K $125K $500K (NEW/USED) ON INVESTMENT OF $2M $500K $2M ON QUALIFIED LEASEHOLD IMPROVEMENTS $250K - $250K BONUS DEPRECIATION 100% 50% 50% (NEW) ESTATE/GIFT TAX ESTATE/GIFT EXEMPTION $5M $5M $5M ESTATE/GIFT TOP RATE 35% 35% 40% ANNUAL GIFT TAX EXCLUSION $13K $13K $14K (1) (2) (3) AGI threshlds are $450,000 (MFJ) and $400,000 (Single) AGI threshlds are $250,000 (MFJ) and $200,000 (Single) Phase-uts begin at AGI f $300,000 (MFJ) and $250,000 (Single) Child Tax Credit, Earned Incme Credit, Renewable Energy Credit and Tuitin Credits Extended AMT was permanently indexed fr inflatin retractive t 2012 (exemptin $78,750 MFJ and $50,600 Single) Unemplyment cmpensatin was given a 1 year extensin; FSA maximum is nw $2,500 per emplyee $2M Cancellatin f Debt incme exclusin was extended frgiveness f debt n principal residence Medical expenses must be greater than 10% AGI, except if age 65 r lder (7.5%) Blcks 27% Medicare payment decrease t dctrs fr 1 year; Research and Develpment Credits renewed Sale f small business 100% capital gain excluded Fr mre infrmatin, please cntact Debrah Dicksn, CPA, CFF, MAFF 8